Monday, February 8, 2010

Gold's Next Bull Run May Be Just Around The Corner

With gold falling recently, there may have been a fall in enthusiasm for gold but the fundamentals are still in place. With the Fed's policies unchanged and the threat of some nations defaulting on their debt, the possibility of a strong bull market may be just around the corner. See the following post from Expected Returns.

After a 15% correction in gold and a 40% correction in many miners, most latecomers to the gold bull market now know that investing in gold is not easy! These are the kind of corrections that really test the conviction of gold bugs; I wonder how many will still be around when the next leg up in this bull market begins.

In any bull market, corrections of this kind are the norm, yet investors get so caught up in the daily swings that they end up selling at precisely the point that would have yielded them maximum profits. In other words, they sell at the bottom. The healthy correction in gold stocks should have long-term gold bulls celebrating on the streets, yet many are at maximum levels of despair. I suspect many latecomers to the gold party have finally capitulated and are swearing off investing in gold forever- that is, until we put in the next intermediate term top, at which point, they will be buyers again. The increasing bearish sentiment gold is a bullish sign and very conducive to the next leg up.

Be patient- this bull market has years to go.

Technical levels of interest

Now that gold has broken down below the multi-month consolidation zone, I would be looking for gold to consolidate between $1,040 and $1,050 dollars. Look for a possible retest of the breakout level of $1,025 dollars. The 200- day moving average is still firmly moving up, and this will serve as another level of support moving forward.

Fundamentals, Fundamentals, Fundamentals

What in the fundamental picture of gold has changed in the past 2 months? Has our government decided to rein in their spending? Has Helicopter Ben Bernanke stepped down yet? Have central banks become net sellers of gold? Has mine production risen substantively, altering the supply/demand dynamic?

The answer to all these questions is no. The fundamentals in gold are still in place, and are in fact, stronger than they were months ago. With rising volatility and threats of sovereign defaults looming everywhere, there will be a mass flight to quality, which means gold. Right now, gold is selling off along with every other asset class besides bonds. This is a miscalculation by the market. However, it usually takes the market some time to sort out short-terms mistakes caused by the raw human emotion of investors. Do you remember the massive rally in gold shares that followed the broad sell-off in stocks in the Fall of '08? Well these are the kind of severe oversold conditions we are starting to see now in the gold space.

That being said, I am still very bullish on gold in the long run. All corrections should be used as buying opportunities.

This post has been republished from Moses Kim's blog, Expected Returns.

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